debt ceiling debate and confirmation bias

Reform Party of California

The debt ceiling debate and biased thinking

Context

Treasury Secretary has warned that "nothing good" will come if congress does not raise the debt ceiling, which is projected to be breached on or about October 17, 2013. Secretary Lew asserts that if Congress does not pass a debt-ceiling increase, the U.S. will be “dangerously low” on cash and risk defaulting on its debts.[1] Governments and business groups worldwide are very nervous about this and they mostly urge congress to increase the debt ceiling. PIMCO, a major holder of U.S. bond debt, holds no U.S. bonds that come due from now until December because they did not want to take any chance whatever of holding any U.S. bond that is anywhere near a default.[2] That is how sensitive at least some investors are to risk. They have a hair trigger and are willing to take no more investment risk than is absolutely necessary in view of projected returns on their investment.

From a non-ideological pragmatic point of view, i.e., the Reform Party of California's (RPCA's) point of view, an urgent question is exactly what would happen if the debt ceiling is not raised. The question is urgent because many republicans in congress now believe that the the effect of not raising the debt ceiling would not create significant problems for the U.S. or world economy. The thinking is that there is sufficient incoming tax revenue to service existing debt obligations and any income shortfall would be addressed by spending cuts and/or late payment on various debt obligations as they come due. Obviously, many people outside of congress disagree either by words or by action, e.g., PIMCO's exit from risk.

A complication to assessing the options and predicting outcomes is in innate biases attached to ideology. Even the very best and brightest experts have a very hard time in consistently predicting outcomes from policy choices in their fields of expertise.[3] The adverse effects of ideology on clear, logical thinking can sometimes be powerful and painfully obvious to unbiased observers but almost impossible to see in the ideologue's own mind.[4] Acknowledging and seeing internal bias in one's own thinking is difficult and it can be very unpleasant. That is especially if a person is an ideologue, because reality just does not care about any one's ideology and the two often collide, leaving a mess behind.[4] Most people may not be aware of this normal human trait at all, but the phenomenon known as confirmation bias has been well known for decades in the social sciences.[5]

Confirmation bias or confirmatory bias is a tendency of people to favor information that confirms their beliefs or faith (ideology). The phenomenon is manifest by selective memory and biased interpretation of information. The effect is more powerful for deeply entrenched beliefs or ideology, which tends to irrational emotional bias into issues. Another adverse effect of confirmation bias is that it tends to lead a person to interpret ambiguous evidence as supporting their existing ideology or belief.

Biased memory and interpretation of information have been invoked to explain several bad outcomes on thinking. One bad outcome is attitude polarization, the phenomenon of disagreements becoming more extreme in the face of the same data or evidence. Another bad outcome is the phenomenon of belief perseverance, which is persistence of beliefs after the evidence supporting the belief is shown to be false.[4] There are other bad effects, but the point is obvious - ideology influences thinking in ways that are usually counterproductive for smart, efficient politics (and most everything else).

One observer had this comment: "Smart people believe weird things because they are skilled at defending beliefs they arrived at for non-smart reasons."[6] A corollary to that might be that if you do not have beliefs to defend when going into a debate or issue, then that neutrality ought to reduce the ill-effects of normal human biases on thinking that comes from ideology.

 

What happens if we do not raise the debt ceiling?

The RPCA simply cannot predict what effects, for better or worse, there would be from doing nothing and allowing the chips to fall where they will. The RPCA's instinct is to oppose endless raising of the debt ceiling. In the long run, continuing to do that positively will ruin the economy and wreck our standard of living. There is no question about that ultimate outcome if we do not change the way we handle our financial affairs. The question is how long the debt party can go on. The counterpoint to that ideology, is the fact that the two parties are highly polarized, very antagonistic and, if a default of some sort did occur, it is unclear that they could cooperate to take actions that experts might argue would be needed. The grip of ideology and the polarization it engenders makes prospects of intelligent, fast action by congress appear to be very, very unlikely. Gridlock appears to be the new norm in two-party governance.

 

What about the broader context?

The intelligent approach to this is to set instinct or ideology aside and look objectively at everything. It is obvious that there are vastly differing versions of what would happen if the debt ceiling is not raised and/or we default on some or all U.S. debt. Most expert opinion argues that the effects would be bad to catastrophic for the U.S. and probably the rest of the world's economy. They do not want to come anywhere close to a default. Minority opinion, coming mostly from conservative republican and/or libertarian ideologues, is that things would go on just fine or with only modest problems at worst. U.S. public opinion appears to support raising the debt ceiling and not defaulting on any debt.[7] For the minority, outcomes other than debt service default would occur and thing would stay more or less normal.

 

As with global warming, this issue is not simply political. The voices of economists should carry some real weight. Most politicians are not economists, much less economic experts. In global warming, the RPCA has argued that the voices of the majority of climate scientists need to be heard and accorded proper weight.[8] What politicians have to say about it is secondary at best. There has to be one or more reasons for the disconnect between the minority who argue that the debt ceiling does not need to be raised and those who argue the opposite. The RPCA's concern here is that minority opinion is largely ideologically-driven and heavily influenced by some sort of confirmation bias associated with conservative, anti-government ideology. Other than the authority that comes with majority expert opinion, the RPCA is aware of no basis for the confident predictions of either side because America has never defaulted on its debt.

Under the circumstances, what would happen to investor confidence and to the U.S. and foreign economies simply cannot be predicted. We are approaching blindingly complex but uncharted waters. Given congressional polarization and dysfunction and the fickle nature of investor confidence coupled with the size of U.S. debt and a frail economic recovery, the RPCA reluctantly concludes that the intelligent thing to do is to raise the debt ceiling and continue trying to address our chronic fiscal problems. That opinion comes with the full recognition that the spending urge in congress is very powerful and has not been restrained by either democrats or republicans in recent decades. Very good arguments can be made that neither side in this impending train wreck is anywhere near to being serious about dealing with fiscal and budget matters.[9] It also recognizes that what appears to be the most intelligent and compassionate approach, such as that advocated by the Simpson-Bowles commission, is ideologically unacceptable to both sides in this endless, self-serving debate.

 

The choices that the two-party system have given us, and the position they have put us in, are simply bad and awful. What we are getting from the two sides is a blitherfest of nonsense.

Footnotes:
1. Link: http://www.cbsnews.com/8301-3460_162-57606229/treasury-secretary-warns-congress-nothing-good-will-come-of-failure-to-raise-debt-ceiling/; http://www.bloomberg.com/news/2013-10-06/u-s-to-default-if-debt-ceiling-not-raised-lew-says.html.

2. Link: http://www.npr.org/blogs/money/2013/10/10/230914894/what-a-u-s-default-would-mean-for-pensions-china-and-social-security.
3. Link: http://reformparty.org/reform-party-commentary-injecting-rationality-into-irrational-politics/.
4. Link: http://reformparty.org/reform-party-of-california-commentary-why-ideology-is-bad-for-politics/.
5. Link: http://en.wikipedia.org/wiki/Confirmation_bias.
6. Kida, Thomas E. (2006), Don't believe everything you think: the 6 basic mistakes we make in thinking, Amherst, New York: Prometheus Books, page 157. Kida attributes the quote to the same individual, Michael Shermer, that authored the commentary discussed at footnote 4.
7. Disapproval with republicans in congress is increasing (http://www.gallup.com/poll/165317/republican-party-favorability-sinks-record-low.aspx?utm_source=WWW&utm_medium=csm&utm_campaign=syndication). Presumably that disapproval is driven at least in part by unhappiness with the prospect of a default or other side-effect of not raising the debt ceiling.
8. Link: http://reformparty.org/reform-party-of-california-essays-6-what-is-the-public-interest-and-how-is-it-best-served/. 
9. Link: http://reformparty.org/the-tax-gap/.